Microsoft Reports Strong Windows 7 Sales, Revenue Growth

Microsoft reported an uptick in revenues during its third-quarter earnings call on April 22, with its Windows division buoyed by strong sales of the Windows 7 operating system. Year-over-year revenue also climbed for its Server and Tools, Online Services Division, and Entertainment and Devices Division. Although Microsoft's business division revenues were slightly down year-over-year, Microsoft executives indicated that they were seeing the beginnings of increased business spending in areas such as desktops and cloud-computing services.

Microsoft reported positive news during its fiscal 2010 third-quarter
earnings call on April 22, with revenues climbing 6 percent year-over-year to $14.50
billion. Operating income, net income and diluted earnings per share also rose
by double-digit percentages, which the company seemed to attribute to continued
strength in Windows sales along with positive traction in other areas.
Those financial results included a $305 million deferral of revenue from the
Microsoft Office 2010 Technology Guarantee program, according to Microsoft.

"Windows 7 continues to be a growth engine, but we also saw strong growth in
other areas like Bing search, Xbox Live and our emerging cloud services," Peter
Klein, Microsoft's chief financial officer, wrote in an April 22 statement
ahead of the earnings call. "Our record third-quarter revenue along with
continued rigor on cost management resulted in exceptional EPS growth."

But part of that growth, Microsoft executives seemed to suggest, also came
from businesses opening their wallets a crack for IT infrastructure, a change
from the past several quarters' relatively stagnant spending due to the effects
of the long-lasting global recession.
"Business customers are beginning to refresh their desktops and the momentum
of Windows 7 continues to be strong," Kevin Turner, Microsoft's chief operating
officer, also wrote in an April 22 statement. "We are also seeing tremendous
interest in our market-leading cloud services for business."
During the earnings call, Klein suggested that the quarterly numbers were
indicative of "strong product momentum" along with a "return in business
hardware spending." He cited Bing's 10 consecutive months of growth, the
commercial availability of Azure in 41 countries, Windows 7 being the company's
fastest-selling operating system, and the announcements of Windows Phone 7 and
Kin as evidence of that momentum.
Bill Koefoed, Microsoft's general manager of Investor Relations, told media
and analysts during the call that Microsoft saw "renewed strength" in the SMB
(small to midsize business) market, with 15 percent year-over-year growth. Enterprise
spending, he said, was "in the beginning of a recovery, but with lengthened
sales cycles." Demand in business PCs, he added, was up 15 percent
year-over-year.
However, the actual financial statements released by Microsoft ahead of the
earnings call suggested a somewhat more mixed story. Revenues for the Windows
& Windows Live Division were $4.4 billion, a substantial increase from the
$3.4 billion reported in the same quarter for 2009, before the release of
Windows 7; on the other hand, revenues for the Microsoft Business Division were
$4.2 billion in 2010, somewhat below the $4.5 billion reported in 2009.
Year-over-year quarterly revenue for its Server and Tools, Online Services
Division, and Entertainment and Devices Division were also up slightly.
Microsoft
found itself hard-hit by the global recession as businesses cut back on their
IT spending. The company reported a 17 percent year-over-year revenue
decline for the fourth fiscal quarter of 2009, followed by a 14 percent decline
for the first fiscal quarter of 2010. In the face of those pressures, Microsoft
instituted a round of belt-tightening, including
layoffs of more than 5,000 employees through the course of 2009.
Although Microsoft remained cautious about Windows 7's commercial prospects
following its October 2009 release, the operating system proved to be a solid
hit with consumers, selling some 90 million licenses by March 2010. However, business
spending refused to parallel that consumer uptick, with Koefoed telling
media and analysts during a Jan. 28 earnings call that "we have not seen a
return to enterprise growth" and that "weak business PC sales" continued to be
a drag on that market segment.
Analytics company Net Applications found in a January study that Windows 7
averaged a 7.57 percent share of the U.S.
operating system market, compared with 66.15 percent for XP, 17.47 percent for Vista,
2.37 percent for Mac OS X, 1.80 percent for Mac OS X 10.6 and 1.02 percent for
Linux. Microsoft claims that more than 10 percent of all PCs worldwide are
running Windows 7.
In a possible bid to increase its adoption among enterprise users, Microsoft
has undertaken initiatives such as extending its Windows 7 Enterprise Trial
program, which offers a 90-day test of the operating system to IT
administrators. But a true business refresh by firms running Microsoft products
would likely have a far more substantial effect on the adoption of Windows and
other software.

Nicholas Kolakowski is a staff editor at eWEEK, covering Microsoft and other companies in the enterprise space, as well as evolving technology such as tablet PCs. His work has appeared in The Washington Post, Playboy, WebMD, AARP the Magazine, AutoWeek, Washington City Paper, Trader Monthly, and Private Air. He lives in Brooklyn, New York.